In This Article:
Today we'll evaluate Sinotruk (Hong Kong) Limited (HKG:3808) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Sinotruk (Hong Kong):
0.20 = CN¥5.7b ÷ (CN¥62b - CN¥33b) (Based on the trailing twelve months to December 2018.)
So, Sinotruk (Hong Kong) has an ROCE of 20%.
Check out our latest analysis for Sinotruk (Hong Kong)
Does Sinotruk (Hong Kong) Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Sinotruk (Hong Kong)'s ROCE is meaningfully higher than the 11% average in the Machinery industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Sinotruk (Hong Kong) compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Our data shows that Sinotruk (Hong Kong) currently has an ROCE of 20%, compared to its ROCE of 2.2% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Sinotruk (Hong Kong)'s ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Sinotruk (Hong Kong).